Why the world wants our food

Donald McGauchie
thinks Australia has missed a huge opportunity to cash in on its agricultural greatness.

The former Telstra chairman and member of the Reserve Bank of Australia board is blunt in his assessment of why one of the world’s biggest exporters of wheat, beef and sugar has failed to create a soft commodities equivalent to BHP Billiton.

“We [Australia] have made a few big mistakes," McGauchie says.

“The two companies that should have been able to do it failed.
AWB
spent far too long defending the indefensible single desk and didn’t build a business. They spent all their cash defending and were not looking to the future. Elders was bad management all round."

AFR
AFR

Where Australia fails, Canada, the United States and China succeed.

By failing to capitalise on opportunity, Australia risks having its major agricultural producers and key agricultural infrastructure fall into foreign hands.

Offshore investors are expected to target Australian agricultural assets with increased intensity in the coming 12 months, elevating concern among agriculture observers that Australia could lose control of key assets forever, posing threats to food security in the decades to come.

Australian Agricultural Company
managing director
David Farley
calls them “gateway" assets: critical infrastructure that food production must pass through – everything from grain terminals to abattoirs.

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Foreigners don’t need to own the farm, he says, to gain control of our food production that could pose sovereign risk for Australia, which supplies much of the demand for food from its foreign neighbours.

“Port silo and loading facilities, abattoirs, cotton gins, rice mills, are all the important gateways to the international marketplace," Farley says. “The owner has control over domestic pricing, access to US dollar income streams and the ability to marginally affect supply and demand pressures in the domestic marketplace."

In the past couple of years, foreigners have bought strategic assets ranging from grain port terminals to meat processing plants. This means all points in the food chain – from farm to plate – are in the sights of foreign buyers.

McGauchie is on the board of a company that is viewed as one of the last big hopes to become Australia’s agricultural champion.

With a market capitalisation of $1.6 billion,
GrainCorp
is eastern Australia’s biggest grains handler and storage business, collecting the bulk of the east coast’s annual production to be stored in its 280 storage sites and exported by an army of global exporters that pay to use its grain elevators at its seven port terminals.

But its unsuccessful attempt last year to buy Australia’s biggest wheat exporter and rural services group, AWB, is cited as being emblematic of the fate of the entire sector.

Those who believe Australia is failing to fully exploit its strength in agriculture say there is a disconnect between local investors and their offshore counterparts that is threatening to leave Australian companies little more than sitting ducks as agriculture consolidates globally.

McGauchie, who is also chairman of
Nufarm
and Australia’s biggest beef producer, Australian Agricultural Company, admits GrainCorp’s inability last year to match a rival bid for AWB from Canadian company Agrium is symptomatic of a big problem for Australian agricultural companies.

GrainCorp’s investors thought its $856 million offer was fair. Matching a $1.2 billion offer from Agrium was viewed as ludicrous.

“It was pretty clear that the shareholders were not prepared to take that longer-term view, so instead of consolidation taking place in Australia, outsiders came in and were able to do it," McGauchie says. “Australian investors undervalue agricultural land and assets. By the time they wake up to it, a fair bit of it will be gone."

GrainCorp’s management may not like it, but the simple fact is that it is now takeover fodder.

Citigroup estimates foreign investors have spent more than $12 billion buying agricultural businesses and farming land in the past four years and $2 billion could have gone unnoticed and unreported because Australia has minimal reporting requirements for foreign investment.

The pace is likely to increase as deep-pocketed foreigners diversify geographic risk, diversify commodities and lower their cost to supply food on the doorstep of an increasingly hungry Asia.

“It’s all about Asia,"
MSF Sugar
chief executive
Mike Barry
says.

“Australia is on the doorstep and you can’t make more land for sugar cane [in Asia] unless you start knocking down houses."

Asian demand for sugar is forecast to grow at 3 per cent a year – higher than the 2 per cent growth forecast globally.

MSF is another example of what could have been. It tried to buy fellow Queensland sugar miller Tully Sugar in 2009 in a scrip deal that valued Tully at $90 million, but Tully shareholders knocked it back.

MSF moved on, buying the northern milling assets of Bundaberg Sugar, doubling its sugar production in the process.

But now Tully is poised to fall to foreign hands.

What began as a $126.7 million takeover from the world’s second- biggest sugar trader, Bunge, has become a competitive battle after China’s biggest sugar importer, COFCO, entered the fray. The bid price for Tully is now $136 million – $46 million more than MSF thought the business was worth two years ago and before cyclone Yasi hurt its fiscal 2011 prospects.

“We wouldn’t overpay for Tully because it would just be too dilutive for us," Barry says. “We have to balance the short-term needs of investors."

He points out that big foreign companies have broader goals that allow the sums to add up where they fall down for Australian investors.

Now even MSF has fallen victim to a foreign predator.

Mitr Phol of Thailand has taken a 19 per cent stake, leaving analysts suspecting it is only a matter of time before it moves for complete control.

MSF isn’t the first to fall. Singapore company Wilmar gazumped Bright Foods of China to buy CSR’s sugar division Sucrogen for $1.75 billion last year.

“CSR could have been an Australian global dominant player," Barry says.

He adds that too often agricultural companies have to diversify their earnings away from agriculture to smooth out earnings and satisfy the demands of myopic investors but then get unstuck.

“CSR could have been a global sugar company but instead it bought a glass business," he says.

“I tell investors we are not going to buy a plasterboard business or anything else. We are a pure play sugar company. That means there will be peaks and troughs."

Elders
, one of Australia’s oldest rural brands, nearly collapsed in 2008 as its ill-fated diversification strategy led it to gobble up everything from manufacturing automotive parts to fine bone china.

It has been selling off assets to stay afloat as it returns to its roots – agricultural services – and has a mountain to climb before its rural supplies business returns to its heyday.

McGauchie says: “We are starting from behind to get Australian companies of the size and scale of some of these global players."

There doesn’t seem much hope on the horizon.
James Fazzino
, managing director of Australia’s largest fertiliser company,
Incitec Pivot
, says his company will always favour deploying capital for expansion to its mining explosives business Dyno Nobel over agriculture. His reason? Producing mining explosives is less volatile. It’s more predictable. It’s less reliant on the weather.

Australia is a country of drought and flooding rains. The extremity of the weather plays havoc on balance sheets and leaves investors nervous. But as they fret, offshore buyers are plundering, leaving little opportunity for local companies to diversify risk to the balance sheets by buying assets offshore and emulate the foreigners.

Australia’s last agricultural export monopoly, SunRice, was given a fighting chance when a minority of its grower shareholders blocked a $610 million bid from the world’s biggest rice trader, Ebro Foods. But even then, many think it may only be a matter of time before the rice group is consumed. If not, high debt levels will restrict growth.

Farley says that these days Australian producers have a second problem. Even if they fight off foreign control they are “encumbered" to the gateway owners if they want direct access to the global soft commodities boom.

In the past two years, Canadian company Viterra has bought South Australia’s grains handling and storage business, Brazilian JBS Swift has become the country’s biggest meat processor and the world’s biggest agriculture company, Cargill, has bought the nation’s biggest wheat exporter AWB from Agrium and taken a half share in Australia’s second-biggest meat processor, Teys Bros.

It’s part of a great global consolidation as companies or countries secure food supply and infrastructure.

Australia is a prime target and it’s not just our proximity to Asia that’s driving the trend.

“Even if Australia’s population grows it will still be a net exporter of wheat, rice, sugar," says a senior executive managing the Australian operations for a major global commodities trader. “So if you want to export, Australia is a good place to be. The other thing that is attractive is that Australia is a safe place to invest. There is a rule of law. The law is understandable and the laws are applied. There is less government intervention."

Global agricultural groups are looking to source commodities from across the globe to not only manage the risk brought by weather but also government intervention.

Russia last year put a ban on wheat exports after drought cut local production and put pressure on local prices.

The trader says: “If you want to make a commitment to supply a customer and Russia or the Ukraine decides to put an export ban on your source, what do you do?"

Commonwealth Bank agricultural economist Luke Mathews said political risk in countries in southern Africa and South America, and government intervention in eastern Europe, left Australia well placed to capitalise on foreign investment.

“Australia has close proximity to growth export markets in south-east Asia, we have the commodities, we have the production capacity for commodities in high demand and Australia has less geopolitical risk," Mathews says.

Veteran agriculture deal maker David Williams, who runs boutique investment bank Kidder Williams, believes it will be only a matter of time before assets are returned to Australian hands. “Australia went through a period in the 1980s where a big chunk of agri, food and land assets were sold to the Japanese at big prices," he says.

“Many of those investments have now been exited at losses. Today, owners of food assets have another chance to sell at record prices . . . but rest assured, many of those businesses will be back in Aussie hands in 10 years at prices lower than what will be received now."

McGauchie is more cautious. “Is it a bad thing that foreigners are coming in?" he says. “Not particularly. We’ve always had foreign capital. That’s a fact of life. But what we will find is that when the Australian investors wake up to it, they’ll realise a lot of it is gone."

But if Australian investors have been happy to back the hard commodities boom – look at the share price graph of BHP Billiton – why don’t they see similar value being created by soft commodities?

“That’s because we have a gazillion publicly listed resources and energy companies that are all raising big amounts of capital and telling a consistent story [about Asian demand]," Barry says. “In the agriculture space who do you have? There are only a few of us."